Tax Avoidance and Information Disclosure: Evidence From Income Tax Expense Reconciliations in China

ABSTRACT The public disclosure of tax‐related information enables investors to understand corporate tax behaviour. This study explores how tax avoidance affects tax‐related disclosures on the basis of income tax expense reconciliations in China. To support our empirical analysis, we employ the merger between China's state tax bureau (STB) and local tax bureaus (LTBs) as a quasinatural experiment that reduces tax avoidance among companies that were previously managed by LTBs. Our results indicate that after the reform, the affected companies reduce their tax‐related disclosures, thus suggesting the existence of a positive relationship between tax avoidance and tax‐related disclosures. Furthermore, this positive effect is more pronounced in firms with lower tax compliance risk, stronger corporate governance or lower external information transparency, as well as in non‐SOEs. Our study suggests that firms that exhibit higher levels of tax avoidance increase their quantitative tax‐related disclosures to help investors assess tax behaviour accurately. However, the proprietary costs associated with tax‐related information, managerial agency costs and state ownership weaken this incentive.